Will I Lose My Car If I File for Bankruptcy?
The following is presented for informational purposes only and is not intended as legal advice.
Filing for bankruptcy can be a life saver, especially if your debts are outpacing you assets. It can be a challenging process, and it's not a good fit for everyone, but ultimately if you've decided to pursue a personal bankruptcy it's because you feel it's the best solution to your financial problems.
Bankruptcy can be complicated, though. Not all debts can be included in a bankruptcy, and you may end up losing some valuable assets in the process, including personal property. One of your most valuable assets may be your car. And so if you're considering filing for bankruptcy, you may be wondering: can I keep my car?
How to determine if you can keep your car in a bankruptcy
Are you filing Chapter 7 or Chapter 13?
Personal bankruptcy typically comes in one of two flavors: Chapter 7 and Chapter 13. Chapter 7 involves the liquidation of non-exempt assets to partially repay your creditors. Chapter 13 involves the creation of a repayment plan that allows you to keep most assets in exchange for making agreed upon monthly payments.
If you're worried about keeping your car or any other important assets, Chapter 13 (also known as the wage earner's plan) is the way to go. If your income is too limited to make a payment plan feasible, you may qualify for a Chapter 7 bankruptcy, but you could potentially lose your car in the process.
However, even if you do end up successfully filing for Chapter 7 bankruptcy you still may be able to keep your car assuming it's covered by your state's bankruptcy exemptions.
Do you qualify for any bankruptcy exemptions?
Bankruptcy laws differ from state to state, and the most crucial way they may differ is in the available exemptions.
Exemptions determine what personal property you can keep in a bankruptcy. These are the items that won't be sold by your trustee to help repay your debts. Most states offer some version of the following exemptions:
- Homestead exemptions, which protect the equity in your primary residence.
- Vehicle exemptions, which protect the equity in certain motor vehicles.
- Wildcard exemptions, which provide protection to items otherwise not already protected by another exemption.
Even if your state does have a vehicle exemption, it may not be enough to help you keep your car.
What are the bankruptcy exemptions in your state?
Again, the laws differ from state to state, so it's a very good idea to work with a attorney. If you're just doing some initial research, start by finding a breakdown of the bankruptcy exemptions in your home state (where you'll be filing for bankruptcy).
Look for the vehicle and wildcard exemptions in your state. Some states are fairly generous. Texas, for example, has an unlimited exemption for motor vehicles. If you file for bankruptcy in Texas there's a very good chance that you'll be able to keep your primary vehicle no matter how much equity you've built up.
In New York, the exemption limit for one motor vehicle is $4,550 (or $11,375 if the vehicle has been equipped to meet the needs of someone with a disability).
Many states will also allow you to choose the federal exemptions, which protects up to $4,000 worth of vehicle equity.
How much equity do you have in your car?
Most people have little to no equity in their car. That's because car value's depreciate so quickly after purchase, so until your car is mostly paid off, there's not much equity to speak of. Which is good if you want to keep the car in a bankruptcy. Without any equity there's not much reason for the trustee to sell your car.
To figure out your equity you need to know how much your car is worth. Kelley Blue Book is still the standard for determining value for automobiles. Find your car and find your listed value.
To find your equity, simply take your car's value and subtract any remaining car loan balance:
- $10,000 car value - $7,000 loan balance = $3,000 in equity
- $10,000 car value - $10,000 loan balance = $0 in equity
- $10,000 car value - $0 loan balance = $10,000 in equity
Is your equity covered by your state's exemptions?
Normally, having a lot of equity in your home or automobile is a good thing, but when filing for bankruptcy it may be costly. To figure out whether or not your vehicle may be sold by your bankruptcy trustee, compare your equity to the exemptions in your state.
In Texas, where the motor vehicle exemption is unlimited, all three of the above scenarios would keep their car.
In New York, on the other hand, those first two scenarios are protected because in both the equity is less than the exemption limit of $4,550. In the third scenario, the most likely outcome is that the trustee would sell the vehicle, give you $4,550 (the exemption amount), and distribute what remains (minus fees) to your creditors.
So the answer to the question, "Will I lose my car if I file for bankruptcy?" is ultimately pretty complicated. It depends on the laws in your state, the value of your car, and the balance on your car loan.
If you're contemplating bankruptcy but aren't sure if it's the best option for you, consider working with a nonprofit credit counselor first. We can help you review your debts and discuss all of your available options (including bankruptcy). It's a free, no obligation way to get some unbiased advice and guidance.
